NAB Monthly Business Survey: August 2016

The results from this month’s survey remain broadly consistent with our prior view of the economy and the near-term outlook. It points to a patchy, but sustained, improvement in the non-mining economy, with the major services sectors and construction leading the way.

Key points:

Despite some moderation in business conditions, results from the NAB Monthly Business Survey remain reasonably upbeat. Business sentiment has proven to be resilient to negative influences over recent months, which has flowed through to more stable (and above average) levels of labour demand.

The business confidence index rose slightly to +6 index points in August (from +4), which is consistent with the long-term average of +6. Solid outcomes for business conditions have likely underpinned business confidence in recent months, but the RBA’s 25bp cut to the cash rate may have further bolstered sentiment in August – although the improvement in confidence was not broad based.

Business conditions (which is a combination of trading, profitability and employment conditions) eased back further in August, to +7 index points (from a revised +9). While this is the lowest level of business conditions since the start of the year, the index is still above its long-run average level (+5) – having consistently remained above this level since early 2015.

The strength in business conditions remains largely confined to the major services and construction industries, while relatively subdued conditions in wholesale and retail warrant close monitoring – particularly in light of disappointing consumption growth in the Q2 National Accounts. Trading conditions and profitability have been the main drivers of elevated business conditions, but while both of these eased in August, employment conditions held steady – pointing to ongoing employment growth. Inflation measures in the Survey generally stayed soft, with retail prices pulling back sharply.

By state, business conditions are looking solid across most regions, with WA the main exception as headwinds from the mining sector continue to bite. NSW conditions have eased notably in recent months, however, despite having the highest index of the mainland states on average over the past three months. Confidence is positive in all states.

NAB’s measure of capacity utilisation dropped back in the month, which could suggest a turn in the long running improving trend. Utilisation rates fell to 81% (from 81.5%), which is in line with the long-run average of 81%. The increase is consistent with elevated levels of trading conditions, although both capex and employment remained positive in the month (adding to capacity).

The results from this month’s survey remain broadly consistent with our prior view of the economy and the near-term outlook. It points to a patchy, but sustained, improvement in the non-mining economy, with the major services sectors and construction leading the way. That said, recent negative movements in retail and wholesale conditions will be a cause for concern should they continue, and we are watching to see if they represent the start of a new trend.

Beyond the near-term, as the effects of previous AUD depreciation, higher commodity exports and the housing construction cycle begin to wane, the outlook becomes more uncertain. All of these factors are expected to come to a head around 2018, and the economy will likely require additional policy support from the RBA ahead of this to firm up growth and stabilise the unemployment rate. NAB economics currently expect two more 25bp cuts by the RBA in mid-2017.

NAB’s latest Australian economic forecasts will be available on Thursday.